* FTSE 100 adds 0.7 percent
* Index rallies on U.S. jobs report after slow start
* Concerns of early end to Fed monetary easing subside
* BP leads gainers after Transocean settlement
By Alistair Smout
LONDON, Jan 4 (Reuters) - Britain's top shares registered their highest closing level for nearly two years on Friday, taking a cue from U.S. jobs data which suggested a broad-based labour market recovery.
However, the relatively slow pace of growth in payrolls outside the farming sector also eased concerns that the Federal Reserve would rethink its monetary easing imminently.
The FTSE 100 index made its gains for the day of 0.7 percent in the two hours following the news, ending up 42.50 points at 6,089.84 - the highest close since Feb. 8, 2011, and just two points off the highest close since May 2008.
The data followed a morning where UK shares dipped, after minutes from the Fed's December meeting released on Thursday evening showed some policymakers were increasingly worried about the potential risks for financial markets of the U.S. central bank's asset purchases.
The Fed said last month it would keep interest rates near zero until unemployment fell at least to 6.5 percent, as long as inflation does not rise above 2.5 percent.
However, some analysts thought the mixed jobs report, with unemployment stubbornly high at 7.8 percent, actually allayed concerns that the Fed would tighten monetary pressure immediately, which supported stocks.
"The paradox of the markets at the moment is that good equals bad and bad equals good, especially following the FOMC minutes yesterday. Any (jobs report) above 175,000 would have increased the pressure on the Fed to start thinking about exit strategies," Ioan Smith, strategist at Knight Capital, said.
"Quantitative easing is leading to sharp increases in asset prices even if it isn't really impacting the real economy as much, (but) it's still likely that the Fed will keep easing until unemployment is below 7 percent."
Cyclical stocks which rise and fall with the economic cycle did well, with oil & gas leading gainers and banks reversing early falls to add 0.7 percent.
BP was the top blue-chip riser, up 2.7 percent and adding nearly 9 points to the FTSE 100 index, after Switzerland-based rig contractor Transocean RIG.N agreed to pay a lower-than-expected $1.4 billion to settle U.S. government charges over BP's Gulf of Mexico oil spill in 2010.
"We are encouraged by the higher volume move on BP led by the Transocean news that removes some of the uncertainty surrounding the liability faced by BP," Atif Latif, head of trading at Guardian Stockbrokers, said. BP traded 130 percent of its 90-day average volume, compared to the 79 percent in the wider index.
Miners pared earlier losses, but were still down 0.8 percent, with Fresnillo among the index's leading fallers.
The precious metals miner shed 4 percent in volume of 1.7 times its average 90-day volume, with traders citing the impact of a downgrade by UBS to "neutral" from "buy". (Editing by Ruth Pitchford)